Pandora earnings: Making a bigger play for audio ads

Pandora now owns AdsWizz, which should allow it to benefit from growth in audio on and off the streaming service

Bloomberg News

Pandora is due to report quarterly results Tuesday after the bell.

By

EmilyBary

Reporter

Pandora Media Inc. is pulling multiple levers to get users to spend more time playing music through its various offerings, but soon the company’s fortunes could be a bit less tied to actual Pandora listening.

The streaming pioneer recently completed its acquisition of AdsWizz, an ad-tech platform that serves as a marketplace of sorts for programmatic audio ads. AdsWizz counts a variety of industry players as customers, and the idea is that the platform will help Pandora
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benefit from secular growth in audio and voice. In other words, the success of AdsWizz on a quarterly basis wouldn’t be completely correlated with listening trends at Pandora.

Pandora Chief Financial Officer Naveen Chopra told MarketWatch last month that he sees his company as having “beachfront real estate” through its place in the audio-advertising world.

“We continue to believe there will be a lot of publishers who see great value in making sure that there’s a single platform for both buyers and sellers of audio,” he said. “That’s something that has really helped other digital formats scale.”

Now that the deal has closed, investors should expect more commentary on the business strategy around AdsWizz when Pandora reports its quarterly results Tuesday after the market closes.

Analysts have expressed mixed feelings about the potential of AdsWizz, especially since the programmatic landscape is getting more crowded.

“Acquiring AdsWizz (closed end of May) could put Pandora in a position to catalyze the development of a programmatic digital audio market, although Google announcing the availability of programmatic audio through DoubleClick Bid Manager in late May represents competition for that position,” Morgan Stanley analyst Benjamin Swinburne wrote in early July.

He rates the stock at equal weight with an $8 price target.

Instinet analyst Mark Kelley, who recently began coverage of the stock with a neutral rating and $8 price target, took a somewhat more optimistic view.

“We believe Pandora’s acquisition of AdsWizz and efforts to boost non-music content position it to benefit from secular tailwinds resulting from the shift in listening time from broadcast radio to digital audio,” he wrote.

Another interesting point related to AdsWizz is that Spotify Technology SA
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was reportedly a customer of the service before Pandora’s move, according to B. Riley analyst Barton Crockett. When MarketWatch asked Chopra about Spotify’s status nowadays, he said the company didn’t comment on any specific partners.

It will be worth paying attention to management’s commentary on AdsWizz during the Pandora earnings call, especially in regards to when and how it will impact financial performance.

What to expect

Earnings: Analysts tracked by FactSet expect Pandora to report an adjusted loss of 16 cents a share, compared with a 24-cent loss per share in the year-earlier quarter. According to Estimize, which crowdsources estimates from hedge funds, academics and others, the average projection calls for a loss of 13 cents a share.

Revenue: The FactSet consensus calls for $373.0 million in revenue for the June-ended quarter, up slightly from $368.1 million a year ago. Estimize projects $375.7 million in revenue.

In conjunction with Pandora’s last earnings report, management forecast $360 million to $375 million in revenue.

Stock movement: Pandora shares have risen following four of the company’s last 10 earnings reports. On the day after the company reported March-quarter results, the stock gained nearly 20%, marking its best day on record. Shares are up 57% so far this year, compared with a 5.4% rise for the S&P 500
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Of the 29 analysts tracked by FactSet who cover Pandora, 11 rate the stock a buy, 17 call it a hold, and one labels it a sell. The average price target is $7.86, roughly 4% above current levels.

What else to watch for

Some of the most important numbers for Pandora are its listener metrics. In particular, investors should be watching for improvement in listener hours as well as subscriber numbers for Pandora’s Plus and Premium paid offerings.

Analysts tracked by FactSet expect that listener hours totaled 4.9 billion during the second quarter, down from 5.4 billion a year earlier.

Like Spotify and Apple Inc.
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Pandora now has a family-plan option for paid subscribers, which was announced during the most recent quarter. William Blair’s Ralph Schackart, who rates the stock at outperform, said it was “difficult to pinpoint exact figures” for family-plan usage across the industry, but he believes that these plans were probably used by “a fair portion” of Spotify listeners.

Pandora executives may share early details about family-plan uptake for its own service, as well as the projected impact on the company’s financials. Family plans help keep Pandora competitive with other services, but in general they also tend to bring in less money than if each member of a family were to have his or her own account. Spotify benefited from family plans in its second quarter.

Advertising metrics are also crucial for Pandora. Look for management commentary on ad load during the quarter and whether newer initiatives like shorter ads are having their desired affect.

Another key focus area for Pandora is Premium Access, a feature that lets listeners of Pandora’s free, ad-supported service unlock sessions of Premium on-demand listening in exchange for watching a video ad. Premium Access serves two purposes: driving up engagement of the free service by making it more appealing to users, and showing free users what the on-demand offering is like so that some might be willing to pay up for it.

Executives will likely be pressed on the success and traction of Premium Access.

In addition, partnerships have become an important part of Pandora’s strategy going forward. In recent weeks, the company announced arrangements with both Snap Inc.
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and AT&T Inc.
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The Snap partnership allows for Pandora songs to be shared creatively via the Snapchat app, and the AT&T move makes Pandora Premium one of a few streaming offerings that subscribers to one of AT&T’s unlimited plans can choose for free in conjunction with their phone plan.

SunTrust Robinson Humphrey analyst Matthew Thornton recently estimated that the arrangement with AT&T could result in 500,000 additional Premium subscribers within a year. He rates the stock a buy with an $8 price target.

Pandora’s Chopra declined to discuss the economics of the AT&T arrangement, other to say that its a wholesale relationship that he thinks is “a very efficient way for us to acquire subscribers and AT&T to make their own services more sticky.”

Raymond James analyst Justin Patterson, who has a strong buy rating on the stock, predicted that “more partnerships are in the pipeline” and said that Pandora “is delivering on its promise to have more efficient customer acquisition.” He’s also paying attention to any forthcoming news about a possible label renegotiation, which could be a catalyst.

Instinet’s Kelley similarly predicts positive outcomes from any label renegotiations. “We believe streaming growth is still in its infancy and expect the labels to cede some margin to the streaming platforms as the global growth continues and streaming services become more important distribution channels,” he wrote.

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